Private villas have expanded in what used to be vast rice fields on the resort island of Bali, a favorite vacation spot for many Chinese. (Sonny Tumbelaka/AFP/Getty Images)

By Andrew HigginsBy Andrew HigginsSeptember 9, 2012

Businessman Anak Agung Ngurah Mahendra called a meeting last month with workers at his clothing factory here on the Indonesian island of Bali and announced “very sad news.” He told them that he was shutting the factory and no longer needed their labor.

“You can blame Mr. Nixon,” Mahendra, chairman of the local chapter of the Indonesian Textile Association, said later in an interview, referring to President Richard M. Nixon’s decision 40 years ago to visit China and set in motion forces that have helped turn the previously isolated and economically decrepit communist nation into a manufacturing powerhouse.

Noting that Chinese rivals often copied his designs and then undercut him on price with foreign buyers, Mahendra said he “just can’t compete with them.”

In other lines of business, however, China is helping, not hurting. With Bali’s tourism industry booming thanks to a surge in the number of Chinese vacationers, Mahendra’s Khrishna Group is planning to build a hotel on the grounds of the shuttered garment plant.

The number of Chinese visitors to Bali increased by 53 percent in the first half of this year compared with the same period last year, according to official figures, making China the second-biggest source of foreign tourists, after Australia, and an important driver of the local economy.

The boom for tour operators and bust for local garment workers are a small part of a complex relationship between Asia’s biggest and third most populous nations and help explain why many in Indonesia, which has about 240 million people, see both promise and pain in their country’s increasingly intertwined relations with its neighbor to the north.

In the seven years since Chinese Communist Party chief Hu Jintao visited Indonesia and signed a raft of economic agreements to underpin a new “strategic partnership” between the world’s biggest autocracy and Southeast Asia’s largest democracy, Indonesia’s total trade with China has more than quadrupled and China is its second-biggest trading partner, after Japan.

But what had been an Indonesian trade surplus of $800 million in 2005 became a deficit of $3.3 billion last year as electrical appliances and other Chinese goods poured into Indonesia.

After years of debate about whether Indonesian industry can survive an onslaught of Chinese products, however, concern has shifted of late from a focus on China’s seemingly relentless rise to signs that its economy is faltering and could even be heading for a crash. A recent rash of gloomy figures suggest that China, where the economy grew last year by 9.2 percent, may miss what by Chinese standards is a relatively modest target of 7.5 percent growth for this year.

The slowdown could bring some relief to Indonesian manufacturers, by bankrupting Chinese rivals, though a surfeit of unsold goods means that surviving factories in China are desperate to unload their wares — at almost any price. This makes them even tougher competitors. At the same time, Indonesia is getting hit as China cuts back on imports of Indonesian coal for power plants — Indonesia is the world’s biggest exporter of coal — and other raw materials.

A severe downturn in China would also be bad news for Bali, where big hotels, their eye on the Chinese market, have been recruiting Mandarin-speaking staff members and musicians who can play Chinese songs at beachfront restaurants. Members of the Bali Circle Quartet, for example, have been listening to tapes of Chinese pop songs and have learned to mimic the words of schmaltzy numbers such as “Tian Mi Mi,” or “Sweet as Honey,” a Chinese karaoke favorite.

Shopping streets lined with cafes, souvenir stalls and surf shops also feature food emporia specializing in bird’s nests and other delicacies popular with Chinese visitors.

‘Irreversible’ ties

Indonesian Trade Minister Gita Wirjawan, a former JPMorgan Chase in­vestment banker, sees ever closer economic links with China as “irreversible” and says that “if you take the long view, this is good” for Indonesia. Indonesia’s economy grew by 6.4 percent in the second quarter and, according to the country’s central bank, will expand by 6.3 percent next year, slower than what is forecast for China but still robust.

China, said Wirjawan, should not be seen as a threat but as an example for Indonesia as this Southeast Asian nation tries to position itself as a low-cost center for high-end manufacturing. Decaying roads, clogged ports and endemic corruption still hold Indonesia back, but labor costs in many industries here are now lower than those in China, where costs, particularly salaries, have risen sharply.

Foxconn Technology Group, a giant Taiwanese technology manufacturer with more than a million workers in China making Apple iPads and other products, plans to invest up to $10 billion in Indonesia, said the trade minister. The investment will relieve Foxconn’s dependence on Chinese plants, which not only are becoming more expensive to run but also have badly dented the company’s reputation after a string of suicides by workers.

Emmanuel Ruc, director of PT Mitragarment Indoraya, a French-owned clothing maker in Bali, said an ordinary garment worker costs about $100 a month in Indonesia, half as much as in China’s coastal manufacturing centers. But, he added, a “Chinese worker is much more productive” and far readier to work long, unscheduled overtime hours.

Supplies such as cloth, yarn and dyes, as well as energy, are also much more reliable and often cheaper in China than in Indonesia. Chinese factories also enjoy “the full support” of the state, which has provided easy credit through state-owned banks and tax breaks, according to Ernovian Ismy, secretary general of the Indonesian Textile Association in Jakarta.

For Ruc, however, China has lost its once-unbeatable edge as a manufacturing destination. His company closed a factory there and now produces exclusively in Bali, which he described as a far more pleasant place to live and work than the bleak industrial zones of southern China.

Like Mahendra, Ruc said that Chinese rivals copy designs but that such imitation only hurts China in the long run, particularly in the garment trade, where profit margins “depend on creativity.”

A mixed blessing

For the moment, China’s darkening economic outlook shows little sign of slowing a flood of Chinese visitors to Bali’s resorts. The local association of tour operators has set up a special section to deal with Chinese clients, and its chief, Hartono, who like many Indonesians uses just one name, predicts that “before long they will be number one,” ahead of tourists from nearby Australia.

But China’s increasing presence, he said, is a mixed blessing: Mainland tourists can be “very difficult,” demanding rock-bottom rates and then often complaining about their accommodations. And, he added, they tend to be “very noisy,” something that raises eyebrows on an island that is dotted with Hindu temples and that, despite a profusion of bars and clubs opened to serve earlier waves of Western visitors, markets itself as a tropical retreat offering calm and spiritual rejuvenation.

On a recent evening at the Inna Grand Bali Beach Hotel, a group of vacationers from the southern Chinese city of Guangzhou commandeered the hotel’s seafront restaurant for a raucous birthday dinner, grabbing the microphones of a band performing for diners and wailing Chinese songs off-key, including a patriotic number that featured the rousing chorus “We are all Chinese.”

Hartono, an ethnic Chinese and a fluent speaker of Mandarin, said he cannot understand the loud and pushy behavior of many of the Chinese visitors, characteristics that have made them Asia’s modern-day equivalent of the brash, overbearing “ugly Americans” of the 1960s who earned such notoriety in Europe and elsewhere.

“I just don’t understand. We are not like that,” Hartono said, referring to the generally low-key fellow Indonesian Chinese. “We hope they will adjust themselves and eventually calm down.”

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